Q3 2021 Horace Mann Educators Corp Earnings Call
[music].
Good day and welcome to the horseman.
Third quarter Bachelor call, all participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed but yeah. After today's presentation, there will be an opportunity to ask questions.
To ask a question you May press Star then one on your phone.
To withdraw your question you May Press Star then two please note. This event is being recorded.
I would now like to turn the conference over to Heather Wetzel, Vice President of.
Investors. Please go ahead.
Thank you and good morning, everyone welcome to Horace Mann's discussion of our third quarter results yes.
Yesterday, we issued our earnings release, Investor supplement and Investor presentation.
Available on the Investor page of our website.
Or are you just right as president and Chief Executive Officer, and Bret Conklin Executive Vice President and Chief Financial Officer will give the formal remarks on today's call.
With us for Q&A, we have Matt Sharpe and business development and distribution market pressure on P&C pricing standards on supplemental Mike working back on life, and retirement and Ryan Greener and investments.
Before turning it over to Maria I want to note that our presentation. Today includes forward looking statements as defined in the private Securities Litigation Reform Act 1995.
The company cautions investors that any forward looking statements include risks and uncertainties and are not guarantees of future performance.
These forward looking statements are based on management's current expectations and we assume no obligation to update them.
Actual results may differ materially due to a variety of factors, which are described in our news release and SEC filings.
Our prepared remarks, we use some non-GAAP measures reconciliations of these measures to the most comparable GAAP measures are available in our news release.
I'll now turn the call over to Maria.
Thanks, Heather and good morning, everyone last night, we reported third quarter core earnings of <unk> 50 per diluted share, reflecting our continued strong business performance throughout 2021. In addition, net investment income was up 11%.
The strength of our alternative investment strategy.
In line with our previous announcement catastrophe losses were above our 10 year average, which drove the core earnings decreased from prior year, along with auto loss cost approaching pre pandemic levels.
Our underlying P&C performance remains strong as we've stated before our educator customer base is insulated, but not immune from larger industry trends.
The auto line is reflecting changes in driver behavior that we fully expected to normalize and it remains profitable despite rising costs.
We have already initiated rate filings to address these rising costs.
In property. We also continue to see the effects of supply chain disruption and other factors contributing to higher prices.
Which we are addressing with inflation adjustments and appropriate rate increases we will enter 2022 with solid underlying performance and expect to remain competitively priced in both auto and property as we move through the year.
Brett will discuss each business segment and outlook later in the call, but we expect a strong fourth quarter with 65% to 80 cents in core EPS and full year return on equity close to 10%.
This marks the steady increase in our Aro <unk>.
Attributable both to our strategic initiatives and as another strong step towards our long term objective of a sustained double digit Roe.
The third quarter encompasses back to school season for our agency force and their successes were encouraging for our long term outlook, particularly what it means for expanding our education market share in 2022 and beyond.
Echoing the news we read every day about our country's recovery from the effects of the pandemic the path back to a quote unquote normal school environment is fluid.
There are variations geographically, even down to the district level.
This is contributing to variations in the growth trajectories of different segments.
But of course means long term strength lies in the sum of those parts are holistic multi line approach that supports educators with insurance and finally financial solutions at each stage of their lives.
Through the pandemic, our agents have shown their resilience and passion for serving our nation's educators and now across the businesses. There is positive momentum in bringing educator households to Horace Mann.
Our retirement business has remained steady since the beginning of the pandemic and continues to build on that strength.
Third quarter sales were the highest in several years extending back even before the pandemic.
Retirement conversations continue to be a door opener to other cross sell initiatives. This was partially due to our retirement advantage platform, which strengthens our value proposition for districts and educators.
For example, we were recently chosen as the single retirement provider at one of the largest school districts in Kansas.
Going back to school season, we were able to complete dozens of informational meetings across the district hosts to lead generation activities and enroll nearly 500 clients or about 20% of the district staff in our retirement advantage advantage mutual fund platform.
Our opportunity now is to effectively cross sell those customers with complementary solutions.
In supplemental where sales were most impacted by the pandemic, we saw the best quarter since schools move to remote learning in the spring of 2020 <unk>.
Districts and educators continue to recognize that supplemental products have an important role in the changing healthcare landscape, which often means higher deductible health care plan. This fall, we've seen educators respond positively to our supplemental solutions across geographies and in settings Ranger.
<unk> from section 125, Worksite enrollments to retirement seminars to normal back to school activities.
Our section 125 enrollments also are offering cross sell opportunities by making supplemental products available to Horace Mann's approximately 350 long standing section 125 districts. This fall.
<unk> delayed a year by the pandemic, we are offering a more robust benefit to the district and educators.
About two thirds of the districts. We served for section 125 opted for expanded solutions. This year, we expect that percentage to grow and for the expanded offerings to gain traction with additional districts over the coming years.
We're seeing additional cross sell momentum in the life segment, where sales improved over prior year, providing life products has come naturally to the supplemental agents, who already have strength in providing solutions to protect against unexpected events of our top 50 agents for life sales so far in 2000.
21, seven of them joined Horace Mann, when we acquired MTA.
For property and casualty, we are encouraged by strong close rates and a healthy increase in retention as we continue to work with our agents to drive new sales.
We're leveraging the variety of ways, we are reaching educators to introduce our solutions and have experienced stable new sales volumes over the past few quarters. For example, this fall many of our agents used outdoor back to school events as a way to navigate pandemic related concerns.
It's worth noting that the recent changes to the public service loan forgiveness program offer another opportunity to introduce Horace Mann to educators to our student loan solutions platform. This online student loan management program is provided at no cost to K through 12 public school educators.
To help them reduce the burden of student loan debt. We are updating the platform to reflect the additional qualifying payment opportunities announced last month. We believe this valuable program will continue to bring new educator households to Horace Mann through its availability.
In addition, Horace Mann agent recruitment looks to be back on track to be fair recruitment and new agent training during the height of the pandemic was challenging and our team shifted focus to completing the integration of supplemental agents in many cases. This gave those agents the opportunity to support uncover.
Horace Mann territories.
But we're excited about what we're seeing today in recruitment opportunities. Our team has upgraded the recruiting and referral tools to more effectively and efficiently find candidates in the pipeline is strong. We are also finding traction with our associate exclusive agent path, where new recruits are embedded in a top agency.
To learn the job on the job.
As we look across our current businesses through the fourth quarter and into next year, we expect to see this momentum continue with the caveat that we continue to expect variations by geography by product and even by agent as the pandemic recovery waxes and wanes, but overall that momentum.
Offers the potential for growth in customer relationships households, and total top line.
In a few months, we will truly complement our established strength in the individual educator space with the closing of the acquisition of Madison National <unk>.
Madison National enables us to offer employer paid group products like short and long term disability that cover all of the staff within the district. The demand for these products is growing at a steady rate as more school districts invest and comprehensive employee benefit packages to improve recruiting and retention.
Efforts, adding Madison National at the start of 2022 will both bolster our top line by about 10%, even before we see any growth across the businesses and their solutions expand our total addressable market substantially.
Madison's bolt on value doesn't reflect the growth. We believe we can achieve in the worksite business.
And our expectation of earnings accretion of <unk> 15 cents to <unk> 'twenty.
Also does not reflect the value of expanding this business over the past five years Madison National has grown at an average annual rate of about 5%.
We're enthusiastic about improving on that growth as we look to expand beyond the eight mid western states, where they currently right the majority of their business.
It's also exciting to think about how this enhances our value proposition for the education market over the long term, bringing on a well respected company with strong products distribution and infrastructure that meet the needs of our superintendents and school business officials is the perfect complement to our <unk>.
Strength in providing educators with individual solutions and provides a nice boost to our brand recognition and credibility with administrators.
As we noted in our acquisition announcement, we have already signed a long term agreement with Madison National's long time distribution partner that will take effect concurrently with the acquisition further we continue to make solid progress towards an early 2022 flows we have cleared the antitrust review and are working.
With the Wisconsin insurance Department on the requisite regulatory approvals.
With these pieces all in place, we will be able to serve educators and school districts in any of the ways. They received their insurance and financial solutions, bringing.
Bringing these pieces together will enable <unk> to leverage its strong position in the education market to increase our market share in 2022 and beyond.
Before I turn the call over to Brett I want to comment briefly on our new strategic partnership with the International Association of fire fighters to provide voluntary supplemental benefits to their more than 300000 members.
Similar to Horace Mann, and Tas customer base was historically about 80% educators. The remaining 20% is other public service employees, who serve their communities, primarily firefighters and Ta built these relationships over a number of years and we're happy to make this partnership official.
I also want to take a moment to congratulate Horace Mann director Perry Hines on his recent inclusion in Savoy magazine's 2021, most influential black corporate directors lift Perry has been with the board since 2018 and has provided valuable guidance based on his unique combination.
The nation of experience in marketing financial services and education.
Finally, although our current sales environment remains fluid as we return to a more normal environment. We do so stronger with a full suite of competitive solutions to serve those who are looking after our children and moving our communities forward. Thank you and with that I'll turn the call.
Over to Brett.
Thanks, Marita and good morning, everyone, our third quarter core EPS of <unk> 50.
Reflected strong performance across our businesses as Marita discussed. It is also a testament to the value of the revenue and earnings diversification. We've accomplished in recent years in a quarter, where the P&C industry at large was impacted by heavy catastrophe losses, Horace Mann achieved a healthy overall prop.
And we're on track to deliver record or near record results for the full year.
We also expect 2021 return on equity near 10% moving steadily closer to our target of a sustainable double digit Roe.
Diversifying our business has resulted in steadier more consistent capital generation, which will improve the consistency of our shareholder value creation over the long term adding.
Adding the profitable and growing business of Madison National will further diversify our business and will further enhance the consistency of our capital generation.
Recall that the purchased Madison National we will combine excess capital with new borrowing on our expanded revolving credit facility to finance the $172 5 million purchase price when we close our debt to total capitalization will be approximately 25% supporting our curve.
<unk> credit ratings.
After Madison National joins Us Horace Mann should generate more than $50 million in excess capital annually. Looking ahead, we're committed to continuing to build on our successful track record of capital allocation to increase EPS and generate higher Roe.
Beyond supporting anticipated growth, we have several levers to further enhance shareholder value.
There was almost $19 million remaining on our stock repurchase authorization.
Further we expect to maintain our track record of annual increases in our cash dividend, which is currently generating a yield slightly above 3%.
Now turning to the results for the quarter.
As Marita noted, we presume for the past year that there would be a gradual wind down of the effects of the pandemic on policyholder behavior, although the pace is varying by business area and that is what we are seeing.
In this context, we are encouraged by our momentum and very pleased at how our employees and agents continue to adapt and are still fluid environment. So let's look at each segment.
Adam line results from the P&C segment were impacted by catastrophe losses, particularly from Hurricane Ida in auto frequency that continues to return to pre pandemic levels, coupled with rising severity due to the increasing cost of parts and labor.
Last year's third quarter also benefited from the campfire subrogation recovery with the reinsurance reinstatement recovery portion, adding $3 $5 million to last year's premiums and favorable development lowering loss cost by $5 2 million.
In line with our October four announcement catastrophe losses were $38 6 million contributing 25, one points to the combined ratio above last year, and our 10 year average for the third quarter our.
Our fourth quarter 2021 guidance assumes catastrophe losses for that period between seven and $9 million in line with our 10 year average for the fourth quarter as a side note, we do not see any outsized catastrophe losses in October.
Premiums for the quarter were $163 8 million with new business volume remaining below historical levels. We continue to work through the impact of the pandemic on our ability to reach new educators to drive sales, let's look at auto and property separately.
In auto average premiums were down slightly in part due to changes in miles driven during the pandemic, we fully anticipate the average to start to rise in the next several quarters based on current driving patterns. We are initiating appropriate mid single digit rate filings to address normalized.
Frequency and rising severity.
Overall, we remained better position than some carriers that after the lower rates during the height of the pandemic. We are confident our agents will remain competitive on the business say quotes as our rate filings begin to take effect.
In property the underlying property loss ratio improved over prior year, However, rising labor and material costs continue to also impact property severity.
We're addressing this with inflation factor adjustments.
That helped make certain insured values are covered properties remain in line with rising replacement costs.
Some of the adjustments made early in the year are starting to take effect, which accounted for the slight rise in average property premiums in the third quarter.
Renewal price increases over the next year should be in the high single digits due to the combined impact of anticipated rate increases.
Two inflation factors, which will begin impacting renewals in most states starting in November.
Turning to supplemental the segment contributed $31 million in premiums and $11 4 million to core earnings maintaining its very strong pre tax profit margin. It continues to experience favorable trends in reserves and is still seeing the benefit of changes in policyholder behavior due to the pandemic.
We expect the margin will remain better than our longer term target of mid to high 20% for at least the next several quarters net.
Net investment income on the supplemental portfolio continues to reflect the solid progress we have made in improving investment yield.
Supplemental sales were $2 million in the third quarter, the best quarterly sales performance since the pandemic began although still not back to pre pandemic levels were.
We're very pleased to see opportunities for our agents to work with educators and the consultative enrollment model. This fall that has been the most successful route for sales of individual supplemental policies and also among the most impacted route of reaching educators due to the worksite access limitations of the past year.
Yes.
We expect to see steady progress in supplemental sales over the coming quarters, keeping in mind that there is some level of seasonality in that business due to holiday breaks premium persistency remains above 90% a testament to the value educators place on these coverages with about 280000 policies in force.
In the life segment sales continued their steady pace and retention remained consistent we again saw an increase in single premium life sales. These sales tend to be lumpy, but a reflection of improving access.
They are typically more consultative sales requiring multiple contacts with the customer.
Core earnings of $5 1 million. We're ahead of last year mortality costs were slightly elevated in total benefits and expenses returned to targeted levels and net investment income rose 15, 9%.
For the retirement segment third quarter core earnings ex DAC unlocking were up 85%, reflecting the strong net interest margin the net interest.
Spread improved almost 75 bps over last year's third quarter to 297 bps in part due to strong returns on the alternatives portfolio.
The spread on our fixed annuity business remains comfortably above our threshold to achieve a double digit return on equity in this business.
Our solutions for augmenting retirement savings remain a core need for educators.
Annuity contract deposits were ahead of last year's third quarter by two 3% with new annuity sales at their highest level in several years.
While still a small part of the total we also are beginning to see measurable progress in the number of retirement advantage contracts in force with an increase of almost.
2000, or 16% over prior year.
Retirement advantage is the fee based mutual fund platform that we believe represents long term value for this business segment.
The platform offers important benefits for bolt educators and their employers, which is especially valuable because our retirement products are often and educators first introduction to Horace Mann.
Turning to investments total net investment income on the managed portfolio was up almost 13% to $78 $1 million with total net investment income up 10, 7% the.
The increase in NII on the managed portfolio was again due to the contribution of our alternatives portfolio.
Alternative returns are running ahead of our targeted levels. This year due to the relative strength of equity valuations, which have resulted in strong private equity and venture capital returns.
Our other alternative strategies, such as private credit infrastructure and real estate also posted solid performance.
In our commercial mortgage loan funds continue to perform as expected overall, we expect these strategies to combine to generate high single digit annual returns on average over time.
As we near our targeted allocation for these asset classes, we're pleased to see them delivering the intended value a higher income contribution that could be generated through traditional fixed income investments in today's markets without any meaningful shift in the risk profile of our overall poor.
Folio Gen.
Generating a higher yield on our investments will help us achieve our targeted sustained double digit Roe.
The traditional fixed income portfolio had a yield of 436% in the third quarter compared to $4, one 8% a year ago.
Third quarter purchase activity continues to focus on sectors and issuers with more attractive relative value such as triple B corporate high yield credit and taxable munis.
Our new money rate was three 4% in the third quarter and based on current market conditions. We continue to anticipate a core new money rate above 3% for the year.
Our fourth quarter guidance assumes total net investment income of $95 million to $100 million incur.
Including approximately $25 million of accreted investment income on the deposit asset on reinsurance.
This expectation for investment income is captured in our fourth quarter core EPS guidance range of 65 to 80.
In our segment outlooks.
On a segment by segment basis for the fourth quarter, we are expecting.
Property and casualty segment core earnings in the range of 10 million to 13 million.
Supplemental segment core earnings in the range of $10 million to $11 million.
<unk> segment core earnings in the range of $3 million to $4 million and lastly, the retirement segment core earnings in the range of $10 million to $11 million.
In closing we are very pleased with our business progress through the first nine months of 2021 and excited about the momentum that is building in our core business. We are looking forward to closing the Madison National transaction in early 2022, this will strengthen our value proposition for the education market and provide.
Further opportunities for significant growth over the long term.
The transaction is expected to be accretive to Horace Mann's 2022, GAAP earnings by 15 to 20.
Without taking into account their potential for growth, we will see at least the 15% to 20 benefit even though the amortization of intangibles related to purchase accounting means that madison's GAAP earnings will be somewhat lower than statutory income.
The transaction also will deliver at least 50 bps of ROE improvement in the first 12 months after closing.
We expect that contribution to grow over time, as we leverage the new opportunities that Madison National and is complimentary independent distribution bring to Horace Mann.
Thank you and with that I'll turn it back to Heather.
Thank you Brett operator, we are ready for questions.
We will now begin the question and answer session.
Question You May Press Star then one on your phone.
If youre using a speakerphone please pick up your headsets before pressing the keys.
If at any time. Your question is no interest and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Meyer Shields with <unk>. Please go ahead.
Thanks.
Goodbye.
One thing that we're.
Trying to get our arms around is just the regulatory friction in terms of getting auto rate increases.
Approved I'm, hoping you can sort of.
Just give us your expectations and your experience so far.
Sure, Let me turn it over to Mark since he is obviously much closer to that go ahead mark.
Obviously, we're not completely.
Completely different situation.
Then we might have experienced historically and it will be difficult.
I think to predict but we believe there is a number of jurisdictions that we don't anticipate significant regulatory restrictions and there are certainly others, where we do notably.
<unk> comes to mind. It is a big portion of our book, we expect that to be a challenge. However, what I would say there is.
Our ratings structure is very responsive to mileage changes so as mileage starts to increase back in and some of those jurisdictions. We do expect to see premium naturally flow black in even in those places we cannot get rate.
Okay that actually brings me to my next question.
More of a conceptual one is there any way of incorporating car.
Car values into physical damage pricing.
I mean.
To some extent.
<unk> are in there in terms of debt.
The original cost new.
In terms of vehicle symbols, but are you referring to changes in used car pricing and things like that yes.
Yes, exactly because that seems to have been a broader.
The issue I don't know if with the software with an issue across the industry.
And it's typically less of a problem when when the exposure unit incorporates value I, just don't know whether thats feasible.
I think it's a good I think it's a good question, it's something it's worth looking at it's not something we've dealt with.
Typically as an industry historically right. We will receive these kind of surge in used car pricing, but I'd get you draw the analogy to what we might see on the property side right, where we can we can get it through.
<unk> property.
Inflation changes.
Okay. No. That's helpful. And then finally I was hoping you can dig in a little bit if we look at the accident year ex cat loss ratio in property. It was actually 20.
So online fantastic and I was wondering.
There was anything unusual in there.
Well I mean, we.
As you know we have a pretty strong performing underlying book that in the early part of the year. We had commented several times on the increase that we had seen in both fire activity in non weather water losses, and when we look at this quarter.
Strong kind of underlying.
Frequency is there, but we also have just less we've seen less of the fire and non weather water losses, especially the larger more significant ones of those and that they can be lumpy from quarter to quarter.
We certainly still seeing I think very similar trends to what others are seeing.
When you look at the cost of materials and labor that on a claim by claim basis. Those are certainly up but we saw significantly reduced frequency I think given the kind of large fire and large non weather water losses.
And Matt This is Brad if I could just add even when you look at the fourth quarter of last year, it's not unusual to be at that lower level.
Underlying so it's unusual compared to last year for the third quarter, but sometimes property as Mark said can be lumpy.
And have had.
We have pretty low underlying loss ratios.
I think keep that make large key point there is a good underlying profitable book of business.
That underlies that for sure.
Right absolutely understood great. Thank you very much.
Our next question comes from Matt <unk> with JMP. Please go ahead.
Hey, Thanks, good morning.
Good morning.
Marina in your opening comments you termed the kind of the back to school process, which has happened since we last spoke I think you said encouraging I was hoping you could dig in a little deeper there and just give us some color on from a kind of operational or tactical kind of standpoint, what were some of the successes that you walked away and.
Thought that things that you put in place really worked and what might be some of the challenges that you still face and are adapting to I think as you termed today.
Fluid.
Rebound out of the pandemic.
Yeah, Matt I think you as you usually do embedded in your question. There is certainly the answer I think both in.
Encouraging and fluid I think they're I think they're good words and historically, we've always had variations by geography, but in this environment I think those variations are by geography by district and in many cases, even by building and I think we've all seen those variations and fluidity.
This kind of environment across all of our lives quite frankly, and I think this is clearly a time, where having local agents at the point of sale the strength of our distribution. They have shown their resilience they have shown their creativity.
We talk about outdoor activities I can't tell you how much is taken place in parking lots, but the fact that we have local people that were not all trying to do this in a centralized.
Virtual way is really.
Solidifying our strength in our distribution out there but.
<unk> always taken a very holistic approach to the educator market, we talk about the sum of our parts is where our strength is and thats true, but when you step back and you really look at what we've done there is positive momentum there has been positive momentum I mean, you look at retirement.
This third quarter. The sales were the highest they've been in several years, even including pre pandemic environments.
Environment that means many new customers to Horace Mann.
I'm not fully cross sold but our goal will be to cross sell them. The way, we do that the way we usually do.
Supplemental which was hardest hit by the pandemic traditionally fully work site had the best quarter since the spring of 2020 when this all.
Started we're seeing cross sell momentum in our life business.
And in P&C, I mean, we held our own.
When you and sales have been pretty consistent when you look at educators do you think their top priority and a pandemic with everything that they've been dealing with is shopping their auto insurance I don't think so but during that time, our close rate has remained relatively strong and consistent.
And our retention went up and in this environment I don't necessarily think that's a bad thing.
Agent recruitment this quarter really nice signs of life.
We're back in the game from a recruitment standpoint, even with all the things you hear in the environment about hiring and getting quite frankly butts in seats.
We are seeing that energy back in recruitment and that is a certain leading indicator.
To getting the quotes up right for sure. So I feel good about what we've done in this environment, but fluid is a really good word in our agents have have gotten to get creative and what's really cool about all of this all of these new capabilities all of this virtual approach.
All of these things that are occurring in parking lots new ways to enroll new ways to engage in conversation. So they don't go away.
So we will have all of our traditional access and we saw a lot of that combined with new abilities as we build.
A I think an even more robust sales process going forward. So I mean, I I am very encouraged about having the ability to do many of the things that others try to do it.
In a more virtual.
Digital way combined with good local trusted advisors at the point of sale that do what they've been doing for a long period of time.
Long very helpful.
No. The color is great no I appreciate it.
One other kind of higher level question for you I'm just trying to think about you mentioned a couple of times I think in your comments kind of expanding the Tam or the addressable market for Horace Mann and so whether it's in.
The number of households, or dollars of premium or however, you can kind of give it a feel.
How do you think about kind of what old Horace Mann and what I mean by that is like pre NDA pre Madison National what old Horace Mann's Tam was for lack of a better word and what new Horace Mann's Tam is and then some gauge if you kind of what you. How you guys view your market share kind of.
Within kind of that sandbox.
Yeah always always a really hard question for us and if you can hold that thought it really is a big part of what we are working on right now as we close in on the acquisition of Madison National as we Digest all of the learnings from N Ta I get encouraged about more ways to reach <unk>.
Caters right, we know what the K through 12 population looks like and although that waxes and wanes slightly it's still and knowable number right. How many K 12 educators out there we have good information on the amount of extended educators.
Are out there beyond K through 12, and then when you start thinking about others, who serve the community the 20% even ta's business that was firefighters the new endorsement with the International Association of fire fighters, what that could be and what that becomes I think the denominator is very clear.
And we're working really hard on being able to express the numerator a little more clearly, meaning what do we have in house today. So that you can start to see the leading indicators a little sooner for example, when we think about student loan solutions and our work with educators on their students.
Loans, they might have a product yet, but theyre still in the Horace Mann family.
When we think about <unk>.
All the customers that may be single threaded from just an individual supplemental product there in the Horace Mann family and they are a customer so building that pyramid up from the foundation, we are dealing with them on a solution, whether it's student loan or donors choose to okay. Now they have their first product the <unk>.
Ross sell potentially propensity as they work up to be a full customer we're hoping to be able to give you a little more transparency on that life cycle of a customer if you will and what that total household value.
It is worth to us and as you can imagine the information and the data we get from MTA and from Madison National with those acquisitions are added to the more robust data work, we've been doing on what you call. The traditional Horace Mann now all who are smart and in this.
Environment folks are entering the family a little bit differently than maybe they have before so we have the historic data, but think about the ability to have a retirement conversation and the willingness to have a retirement conversation that might have been a customer that's been in the past entered.
Through the garage and now Theyre entering a different way and we have the data we're capturing the data and we're working through that so we can give you much more transparency around that numerator discussion, but what we get encouraged about is there are more folks that are in the Horace Mann.
<unk> doing something with us than ever before.
Makes sense and I look forward to.
A little more detail down the road. Thank you for the answers.
Our next question comes from John Barnidge with Piper Sandler. Please go ahead.
Good morning, and thank you for taking my question.
Can you maybe talk about claims utilization trends for supplemental number of industry participants continued to see some level of tailwind so.
I'm, just curious where are we on that path of normalizing claims trends.
Yeah, I mean, I don't I don't really think we've seen a dramatic change obviously, we saw the pandemic related effects on claims patterns within supplemental.
And that has certainly maybe not gotten back to a more normal level as quickly as we might have anticipated, which obviously is a good thing from a margin perspective, but we fully.
Expect that to return to a more normal level.
At some point for sure Yes, John excuse me this is Brett.
If you go back to our supplemental page in the Investor deck, you can see the gradual incline in the benefits paid ratio.
South of 31 at the first quarter slightly above 31% at the end.
Ended June and then in the third quarter was 33, 5% as Marita mentioned still running below what we would expect.
But.
We are continuing.
Continuing to expect probably an uptick in that in the fourth quarter as well here again, who knows when it will get back to north.
Normal if you will but we are seeing a slight uptick in that ratio quarter after quarter and are planning for that in the fourth quarter as well.
Thank you for the answer.
A follow up on that slide around guidance.
Alternatives portfolio is that mid to high single digit quarterly return or annualized.
That's on an annualized basis John.
Certainly.
I think year to date were hovering around 20% on the on the alternatives around the limited partnerships.
Thanks, Brett that's real helpful and my final question wanted to go back to your commentary about steady progress expected on supplemental keeping in mind holidays.
Is that suggested that there may be.
The sequential deceleration in sales for the fourth quarter.
I think we're not declaring a deceleration, but just with the holidays and schools close that sold in the Worksite site environment that accesses during the holidays slightly limited, but we were very encouraged in the third quarter.
The $2 million in sales, so, but we're not saying that there is a absolute deceleration.
There is a natural seasonality to this supplemental business, considering around enrollment et cetera, et cetera, and thats still there, but what I get excited about is seeing an increase in the trends.
Being able to be there to have the conversations and that certainly is.
Increasing its also going to be interesting to see the benefit and the power of an MTA together with the benefit and the power of our Madison National and what that means in this space going forward.
But I would say if you took a normal trend to supplemental sales that trend is still there. We're just starting to see some of the.
Restriction of a COVID-19 environment easing a bit.
Thanks for the answers and best of luck.
Thank you Frank.
Our next question comes from Geoffrey Dunn with Dowling and partners. Please go ahead.
I'm, sorry, I think it's supposed to be Gary ransom, but.
Uh huh.
Thank you for taking my question I have and thanks Gary.
The I had a big picture question of you've got all of these products this array of products around the educator.
Hi.
Postulate, a perfect Horace Mann customers through their life buys all their products from Horace Mann for protection and savings.
What does that overall mix of business.
Look like and sort of a present value since our U.
I'm, a little bit asking property casualty versus life, but even.
Supplemental life retirement within those segments as well do you have a sense of that.
Yeah, I mean, I mean, we do we do have a sense of when you think about the lifecycle of an educator, what they need when they need it and what portion of that we believe we can and should get so it's a very complicated question that would include our lifecycle.
<unk> that we certainly can show to you.
From studying to be an educator, all the way through retirement, because its going to that that answer is going to differ depending on whether you are talking about.
A 20 year old studying to be a teacher, a brand new teacher or somebody.
At 60, getting close to thinking about retirement and what those products are and they change over the lifecycle.
That customer I mean auto is relatively consistent most people have a car and they drive and that would be consistent but the type of life insurance.
Type of annuity product, whether you save for retirement when you save for retirement, when you think about a need for supplemental products and how they fit it really is a different answer depending on the lifecycle of the customer and then we can take that one step further and stay in the entire population.
What does that mean as far how you would split up the size of the company by those pieces as well as the margin that we would expect by those pieces and I suspect thats really where youre going with that question.
But it is.
A more complicated answer then.
Quick response on a on an earnings call, but that's how we think about it we have we have a pretty clear view, depending on what pocket you fall into what we should be doing with you and then what economic value. We believe we should get from that type of.
Educator.
I guess, what I was getting out a little bit as I was.
I'm sensing that over overall those life cycles the supplemental.
Retirement products.
We will get more become more important over time and I.
Whereas as you said auto and property are sort of stable.
And thinking that those might over the long run grow faster I don't know if I'm off the mark on that no I don't think I don't think you are off the mark at all I mean, we would hope that as the need for those products and we're clearly seeing it both on an individual level and a district level as the need for those products become.
More evident and more robust, especially as districts are trying to solidify their benefits packages to attract and retain educators as you can imagine in this environment.
I think thats why we get very encouraged about building the strength of our offering with the addition of MTA and now Madison National that we've got the whole gamut covered and as we can bring more as we can build those products that both districts and educators need in their retire.
<unk> potentially you might see.
I alluded to this in a response to an earlier question.
A slightly higher percentage of educators, starting their relationship with Horace Mann through retirement accounts that may be.
<unk> been a little bit higher entering through the garage and thats. Okay. We will have the ability to be able to cross sell those accounts and why we're encouraged that many of the retirement deposits that we saw in this very strong quarter. Many of those are brand new Horace Mann customers, which we will have the ability to cross sell but I agree.
With you I think districts, especially.
Are looking for ways that in their benefits package that they can bring.
<unk> robust retirement offering to those educators to to attract them to retain them.
Alright, thank you.
And just.
Switching quickly over to auto you said along the way that your rates are more sensitive to miles I just wanted to make sure I understood. What you meant is that is that classification upon renewal or are you referring to your telematics offerings.
Yes, that's specifically Gary around our renewal classification right, so as policies renew and we validate mileage.
The pricing will move and probably most significantly across the country in California.
Got it okay.
And then one more on auto as you start to take rates.
Oh.
I'm just trying to get a sense of whether the rates you are taking are in fact, what you think is the.
The required rate for these you know the average time of claim out there six months or whatever the time is.
And as a as opposed to doing it with a little smaller steps and purposely trying to not disrupt and taking it a couple of bites instead of going all the way.
<unk>.
Are you is are you understand the question I'm just trying to see if you're taking it all you think you need right now, yes, I think it's a great question and before I turn it over to Mark I do want to just from an industry pressure perspective, I want you to remember that we werent that company or a company to <unk>.
<unk> rates.
To ramp up advertising costs to increase sales right. We're not we don't we don't address this as a pure auto play because we have a holistic approach because we have the sum of the parts. The delta of what we're talking about here is much smaller for us than it may be for.
Some other pure auto players or large auto players and I think it's important for us to remember that.
Cuz, we tend to be we tend not to sell on price. So therefore, we get our fair share we realize that price is important but we tend not to wax and wane as much as the industry does on this issue. So when we talk about being insulated, but not immune that's what we mean.
So mark I don't know if you want to answer that question, specifically, yes, I mean specific to the question about <unk>.
Do we take it all in one big chunk.
Generally our pricing philosophy is try to be slow and steady in <unk> point, if we had not been in a pandemic over the course of the last 18 months to 24 months, we may have been taking two or three points.
Just to just to keep up with normal inflation, because we don't really want to be in a position where we have to take significant rate increases now does that mean.
Jurisdiction by jurisdiction will be the same no. There are other jurisdictions that we need more rate, we may take a little bit heavier approach there.
But we want to be cognizant I think of two things one.
Retention is important to us in growing our book of business.
Through both new business and retaining our book.
As a key area of focus so.
If if we have to temper some of those rate increases in the places maybe we need a little bit more than that may make more sense in the long run from a financial perspective, and also to some extent, we're reacting to the trends we're seeing.
And.
You listen to what all the other companies are saying you follow the industry that this is an unprecedented situation.
A little difficult to predict exactly what's going to happen I think we're in a position now from an overall loss cost standpoint, that's probably where we thought we would be in the first quarter or second quarter of next year and that's when we thought we would need to take rate that's kind of been a little steeper little faster than we thought we're starting to.
To take those actions and we'll have to watch to see how it emerges if we jump immediately react to some of the significant trends and then we see things start to flatten out.
Or even reverse a little bit we don't want to be overpriced, either so I think.
Steady and cautious as the way to go but certainly looking to be a little bit more aggressive.
Then we might be in a normal year, we might be thinking about two or three points as well as our long track record of being conservative in our pecs.
I mean, you can go back and look.
We are not a company to have significant surprises right. We worked really hard on the profitability initiatives that we had in place prior to the pandemic and those are there and we are seeing them.
And to Mark's point, we knew we would be here, we plan to be here and we've already begun to take.
The appropriate action that we knew we'd be taking at the appropriate time, we have a profitable book of business with a profitable predictable homogeneous niche.
Or not in some of the more problematic places like Florida in a great end to a great extent so we.
We feel good about our ability to navigate the place we knew we'd be.
Thank you very much for those answers.
Thank you.
The next question comes from Greg Peters with Raymond James. Please go ahead.
Hi, Good morning, all of my questions have been asked.
I guess the final question that Hasnt been really covered I know you guys have been working on improving your operational efficiency across the franchise.
The expense ratio was up in your property casualty business can you just give us an update on sort of how you're approaching overhead across the footprint I know you're investing your business, but just some updated perspectives would be helpful. Thank you.
Sure Greg This is Brad.
I think with respect I wouldn't get overly.
Excited about the expense ratio being up for just the quarter that will that will go up and down with the timing of several expenses and I would say.
We've typically guided to around 27% expense ratio and don't really see that changing obviously I think we do a good job of managing the expense ratio.
From a operational efficiency standpoint that work continues and we will continue.
Even well into next year.
Sure.
Adding another company to the fold and obviously, we're going to wring out some of the efficiencies there as well.
So that work as we get bigger and in the different lines of business, we're very cognizant of making sure that we're bringing these operations together in the most efficient manner possible.
It's ongoing but I think we have always guided to around a 27% expense rate and we are we are proud of our expense picture. The fact that a company of our size can absorb acquisition and integration cost. The fact that we can absorb major technology advancements like.
<unk> like the implementation of Guidewire I think says a lot as to who we are as a company and I would also say that some of the decreases that many of us have seen as it relates to travel and entertainment and a pandemic environment, taking some of those and using them to advance your digital K.
Capabilities and your digital roadmap I think is a wise investment as well so Brett right. We have a target we're holding to that target, but I think we're all still thoughtful as to how we advance.
The company and use the $1 wisely.
Okay.
Got it thank you for fitting me in.
Thank you.
This concludes the question and answer session I would like to turn the call back over to Heather Watson for closing remarks.
Thank you and thank you everyone for joining US today, we look forward to talking again soon just as an update we are looking forward to a Raymond James Virtual Conference next week JMP Conference virtual the following week and we do expect to be doing some virtual meetings with Piper in early December so you'd like to look forward to talking.
And hopefully here from you.
Have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.